IIP posts strong growth in July on manufacturing gains; up 4.2%

Government has stuck to its forecast of a near 8 per cent GDP growth in the current fiscal, maintaining that the first quarter’s 7 per cent growth will be revised upwards.ET Bureau | September 12, 2015, 09:29 IST

NEW DELHI: Indian industry posted strong growth in July with solid gains in manufacturing, adding to signals that the country’s economy may be gaining momentum after a disappointing start to the new fiscal but dampening hopes of a sharp interest rate cut.

Industrial production rose 4.2 per cent in July, just a shade below the upward revised figure of 4.4 per cent in June, according to data released by the statistics office on Friday. This is much higher than the average 3.5 per cent growth in the Index of Industrial Production (IIP) that analysts had predicted.

While the strong data may bring cheer to stock markets battling growth concern among others, it dashes any hope of a sharp 50 basis point cut in interest rates as the growth trend gives the Reserve Bank room to watch full impact of the monsoon.

Monsoon is likely to end with worse than the projected 12 per cent deficit. The consensus now is that RBI governorRaghuram Rajan will cut policy rates by 25 basis points on September 29. "There is elbow room for a 25 basis point rate cut. There is no surprise in IIP numbers. They just show the economy is gradually recovering," said DK Joshi, chief economist at Crisil.

Rajan has consistently maintained that the central bank will continue its focus on taming inflation. Consumer and wholesale inflation numbers will be released on Monday. The more closely watched consumer inflation in August is expected to slip below 3.8 per cent notched up in July. The government has been backing industry’s demand for a rate cut.

Industry body Ficci in a statement said, "There is a potential to take this growth to a higher level with the help of more supportive policies for stimulating domestic demand and exports." India’s GDP growth slowed to 7 per cent in April-June from 7.5 per cent in the quarter before, triggering a raft of downgrades amidst concerns that the economic recovery lacked strength.

The latest IIP numbers would address some of those concerns with manufacturing posting 4.7 per cent growth in July.

Mining output rose a tepid 1.3 per cent while electricity generation growth was only 3.5 per cent. Capital goods production rose 10.6 per cent in July, though on a low base of 3 per cent contraction in the same month a year ago, providing evidence that government spending push was helping revive investments.

Consumer durables production was up a strong 11.4 per cent while consumer non-durables production contracted 4.6 per cent, confirming the belief that urban economy was stung by rural India that was in considerable stress after two years of deficit rains.

"Sustained growth in consumer durable for second consecutive month is a big positive and will be a growth driver…the budding investment recovery is underway largely driven by government spending," DK Pant, chief economist at India Ratings & Research, said in a note.

Government has stuck to its forecast of a near 8 per cent GDP growth in the current fiscal, maintaining that the first quarter’s 7 per cent growth will be revised upwards when the actual indirect tax numbers are factored in. The indirect tax numbers for August have showed continued growth momentum with tax collections rising 36.7 per cent in the month.

Even after adjusting for increase in service tax rates, higher duty on fuels and withdrawal of some incentives, the growth is a reasonable 11 per cent. Commercial vehicle sales rose 7.6 per cent in August confirming the slight pickup in investment. Passenger car sales growth slowedto 6 per cent in August from 17.5 per cent in July. Industrial growth in April-July was 3.5 per cent against 3.6 per cent in the corresponding period a year ago.